After ECB moves, time to buy oil?
Market expectations regarding the European Central Bank announcement were insanely high. There seems to be a finite number of ways you can more aggressively say "whatever it takes." We seem to have butted up against that ceiling with the ECB move to extend its quantitative easing program and lower rates even further into negative territory.
The reality is that people were short the euro going into the announcement and hoped that there would be a move down allowing for an opportunity to cover some shorts. They didn't get it and were forced to chase prices higher. I believe that move in the euro against the dollar is a big deal and even if the fundamentals have not changed we could see a move up above $1.10 solely on repositioning.
Do the ECB moves have any implications for Janet Yellen?
The U.S. Federal Reserve has expressed some serious concern regarding the strength of the dollar and the dollar's slide after the ECB moves could help them sleep a little easier. However, other markets sometimes get spooked by any sharp moves and the U.S. equity markets may need a little time to digest the euro-dollar reaction.
It seems to me that there are two things that could change the Fed's mind regarding the tightening in December. First, if the stock-market weakness turns into a wipeout — and I'm talking about a 70- to 100-point drop in the in the next few days — or a disastrous jobs report on Friday.
I don't expect either of those things to happen and I believe the tightening will come at the December meeting and the only thing they are discussing now is how much they have to apologize for the hike. Fed Chair Janet Yellen seemed quite confident in Wednesday's speech and I attribute a good part of that to the solid ADP numbers earlier in the day.
I think there are some potential trades that could come out of the ECB moves. It's tough to buy the euro when it's up nearly 3 percent on the day. Crude, however, remains on its lows despite its high historical correlation to the euro. I am considering a long position in crude at current levels and then increasing that position if the January contract can settle above $44 a barrel. I realize that the $44 level seems far off but not when you consider that crude has lost around 70 bucks in a little over a year.
I also find it interesting that no one thinks it's at all possible that OPEC pulls back on production anytime in the near future. That leads me to believe that the same overconfident market position that is currently being tortured in the euro, could exist in crude.
Commentary by Jim Iuorio, managing director at TJM Institutional Services. Iuorio is a veteran of financial markets, where he has traded and provided analysis for large institutional clients for nearly 30 years. Much of his focus has been on rate policy and its effects on equities, commodities and U.S. Treasurys. Follow him on Twitter @jimiuorio.
Correction: What could change the mind of the Fed is a 70- to 100-point drop in the S&P 500. An earlier version of this story said the Dow.